Monday, August 5, 2013

A primer on how to destroy an economy.

How Did Rich Connecticut Morph Into One Of America's Worst Performing Economies?Forbes

The skyline of Hartford, Connecticut.(Photo credit: Wikipedia)

Connecticut has so many advantages that it might be hard to understand how it became one of America’s worst-performing state economies.
As we know, Connecticut is located along an important commercial corridor between New York and Boston. It’s well-served by railroads and highways. Major airports are accessible. Connecticut has many charming towns, historic sights, stylish shops and nice beaches. CNN determined that of America’s 25 towns with the highest median family incomes, four are in Connecticut – New Canaan (#1), Darien (#2), Westport (#5) and Greenwich (#14). The most expensive American home ever offered for sale is Copper Beech Farm which, with an asking price of $190 million, has 50 acres of waterfront property in Greenwich.Although Connecticut lacks a major high tech region, there’s a concentration of executive talent capable of managing large organizations. Many are in financial services.
Despite these attractions, during the past two decades some 300,000 more Connecticut residents have moved out of the state than have moved in. This compares with the current population of about 3.5 million.
Why the exodus?Dismal performance
Perhaps with the complacency of old money, Connecticut policymakers came to believe they didn’t need to compete for investors and entrepreneurs – the key people who make prosperity happen. Keep in mind that government basically doesn’t have any money other than what it extracts from the private sector via taxation.
As a columnist for the Hartford Courant remarked, “businesses here have become vulnerable to appeals from places [like Florida and Texas] that Connecticut leaders once thought they could safely hold in low regard.”
When investors and entrepreneurs consider important decisions like where to establish a residence, where to operate a business and, yes, where to die, they compare their options. From a financial point of view, Connecticut turns out not to be a great option. For instance:

Connecticut ranks #50 – the worst — in annual economic growth. According to the Department of Commerce’s Bureau of Economic Analysis, Connecticut’s economy contracted for the second year in a row. “Connecticut is the laggard,” reported Connecticut Department of Labor economist Daniel Kennedy.

Between 1996 and 2006 – before the financial meltdown and recession — the number of Connecticut small businesses declined by 2.2 percent, while the average experience of all 50 states was a 10 percent increase. Only Ohio and West Virginia did worse than Connecticut. Its small businesses account for about half of the state’s private sector jobs.

Government spending is out of control. Two years ago, Connecticut Governor Dannell P. Malloy signed a $1.8 billion tax hike, the biggest in the state’s history, that supposedly would generate enough. But it wasn’t enough for the next budget, enacted this year. It was balanced mainly with gimmicks like shifting some $6 billion of Medicaid spending off-budget.

State Budget Solutions, a think tank monitoring state finances, reported that among the 50 states Connecticut has run up the fourth largest pile of debts per capita — $27,540. This includes unfunded liabilities for government employee pension funds. The total is almost double the per capita debts of financially-strapped California. Higher debts imply higher taxes in the future.

Barron’s considered Connecticut to be in the worst financial shape – with debt and pension liabilities a higher percentage of GDP (17.1) than any other state. The financially strongest state: South Dakota where debt and pension liabilities are only 1 percent of GDP.

Connecticut has one of the worst business climates in the country. Factors affecting a state’s business climate include the individual income tax, corporate income tax, sales tax, property tax, unemployment insurance tax and security of private property. For example, as the Tax Foundation reported, “Connecticut imposed a temporary 20 percent surtax on top of its flat 7.5 percent corporate income tax, in effect raising its rate to 9 percent. This 20 percent surcharge is an increase on a supposedly temporary 10 percent surcharge that has been in place since 2009.”

The American Legislative Council, in its annual Rich States, Poor States study, ranks states two ways – economic performance and economic outlook. The economic performance ranking is based on a state’s GDP trend, migration trend (in or out) and non-farm payroll enrollment trend. The economic outlook ranking is based on 15 factors including the top marginal personal income tax rate, the top marginal corporate income tax rate, property tax burden, estate tax burden, public employees per 100,000 population, state liability system survey and whether a state has a right-to-work law. Connecticut is ranked #46 for economic performance and #43 for economic outlook.

The Connecticut Business & Industry Association reported that “70 percent of executives believe the value they receive for their tax dollars is extremely low considering the amount they pay in taxes.”

The Cato Institute gives Connecticut Governor Dannel P. Malloy an F grade for his economic policies that throttle investors and entrepreneurs. Malloy “creates a more hostile climate for business, but then tries to compensate for the damage with tax incentives.”

Connecticut’s probate court system seems to have gained a reputation for loading unnecessary costs on estates and sometimes arbitrarily nullifying wills, a practice that’s hard to distinguish from looting. Yale Law School professor John H. Langbein declared that “Connecticut probate is a national scandal.”

How did Connecticut end up in this mess?Some perspective: early success, great potential
Like other states, Connecticut started out with agriculture, then expanded with trade and boomed with manufacturing – ships, railroads, saddles, sewing machines, carriages, brass fittings, corsets, guns, on and on. Such enterprise displayed a lot of Yankee ingenuity.
Fast-growing industries attracted thousands and thousands of immigrants as well as native-born people looking for jobs. Connecticut’s population grew mightily.
During the 1920s, however, Connecticut began to feel competitive pressures as 14 of its 47 textile mills moved to less costly locations in the South.
Democrats gained control of Connecticut during the Great Depression, but neither they nor their “progressive” comrades at the federal level were able to banish depression era high unemployment. It persisted throughout FDR’s New Deal, in part because the New Deal tripled taxes, which meant employers had less money for hiring and consumers had less money for spending. Depression era unemployment didn’t come down until the government began conscripting millions of young men for military service during World War II.